(7) European Union Crisis

AS WELL AS CONSTITUTING THE MOST SERIOUS CHALLENGE to the European project since its inception, the euro crisis has had a huge impact on its political and economic balance, at every level. Among countries, it has hugely increased the influence of some, notably Germany, and decreased that of others, notably France. It has fostered a growing north–south divide in the European Union, which has to an extent replaced the previous east–west one. It has sharpened the division between those countries that are in the euro and those that are not. Among the EU institutions, it has strengthened the role of the European Council at the expense of the European Commission and the European Parliament. And although it has led to deeper integration of sorts, especially in fiscal policy, it has also reduced the political weight of the central EU bodies and increased that of national governments. Many if not all of these shifts in power will endure. Most will profoundly affect the workings of the wider EU as well as the euro zone.

Start with the institutions. Throughout the history of the European project, the balance of power among them and between them and national governments has altered, sometimes for structural reasons, sometimes as a reflection of individual personalities. In its early years the Commission was especially important: many new rules and directives were needed, there was no directly elected parliament and European leaders did not yet meet in the European Council. Yet the French president, Charles de Gaulle, who mistrusted the Commission and much preferred inter-governmentalism, was hugely important. It was de Gaulle who in 1965 precipitated the “empty chair” crisis when France refused to accept a treaty-prescribed move towards majority voting in the Council of Ministers. After a long French boycott of EU meetings, the eventual outcome was the 1966 Luxembourg compromise which, at least according to the French interpretation (now shared by the British), preserves the national veto if a country invokes its “vital national interests” even in legislation meant to be decided by the system of qualified-majority voting enshrined in the Rome treaty and later strengthened in the Single European Act.

The influence and power of later Commissions have fluctuated, but the institution reached its apogee under the presidency of Jacques Delors after 1984. He was a driving force behind both the single market and the single currency; indeed, in the late 1980s he turned into a hate-figure for British anti-Europeans (and for Margaret Thatcher) after he addressed the Trades Union Congress in 1988. He was hugely important for the adoption of EMU. Yet his influence in Brussels had diminished long before he stepped down from the job, somewhat disillusioned, in 1994.1 And neither of his first two successors as Commission president, Jacques Santer and Romano Prodi, was able to re-establish the institution’s previous pre-eminence.

When the Portuguese Prime Minister, José Manuel Barroso, took over as Commission president in 2004, he allied himself firmly with liberalising countries such as the UK, the Netherlands and, to a lesser extent, Germany (while not neglecting the interests of his own country). Under him the Commission has continued to play a crucial role in providing analysis, implementing the rules and drawing up legislative compromises, as well as protecting the interests of smaller countries and of a wider Europe. But it has proved hard to restore the Commission’s political clout at a time of rising scepticism in public views of the European Union. Many national governments have come to see the Commission as too keen on petty regulation and too ready to appease the European Parliament, moving away from its supposedly neutral position between Parliament and Council – a perception that is likely to grow now that, under the Lisbon treaty, the Parliament has been given the explicit role of “electing” the Commission president after he or she has been nominated by heads of government.2

As the Commission’s political influence has waned, the Parliament’s has waxed. Besides its new role in the choice of a new president, the co-decision procedure for almost all legislation under the Lisbon treaty has given it extra powers. In its work on the new excessive-deficits procedure during the euro crisis, the Parliament played a positive role, especially over the new six- and two-pack legislation, which its economic and monetary affairs committee under a British MEP, Sharon Bowles, helped to shape. Yet national governments and EU leaders, even those traditionally keen to give the Parliament more powers, are nowadays increasingly disillusioned with it. This was especially obvious during repeated rows over the EU budget and the multi-annual financial framework during 2013: the Parliament’s instinctive push for even more EU spending than the Commission had asked for won it few friends among net contributor countries. The growing presence of populist and extremist parties in the Parliament, while making it more representative, will not improve its image with national governments.3

The biggest winner from the euro crisis among the EU institutions has been the European Council of heads of state and government, because it brings together the 28 national leaders. That is partly because Herman Van Rompuy, the little-known, haiku-writing Belgian prime minister who was picked to be the European Council’s first permanent president (and was promptly accused by Nigel Farage, leader of the UK Independence Party, of having “all the charisma of a damp rag and the appearance of a low-grade bank clerk”), has in fact proved an adept choice. As an economist from a euro-zone country, he was good at diagnosing the euro’s ills; he has often pointed to the madness of not watching more carefully the rise in current-account deficits. From his background in Belgian politics he has also learnt the art of political compromise. His ability to speak English, French and German, shared also with Jean-Claude Juncker, who chaired the Eurogroup, has been useful. The jobs of European Council and Eurogroup summit president (which he added) have become more significant partly because of how he has done them. And, for the most part, he has forged a good working relationship with Barroso, with the Commission continuing to provide much of the technical and legal support for the work of the European Council.

The main reason the European Council is where the action now happens is that the euro crisis has increased the clout of national governments. This is largely because only national governments can command the resources needed to bail out excessively indebted countries or banks. It is also because, to raise the necessary money, most governments have needed to secure the consent of their national parliaments. In effect, the euro crisis has laid bare a tendency that could be detected long before 2009.

This is that national governments and their leaders (with an increasingly large role played by finance ministers at the expense of foreign ministers, formerly the main actors in Brussels) have become the driving force of the euro zone and, by extension, of the EU as a whole.

Broad political power is thus shifting from the supranational European institutions and towards national governments thanks to the euro crisis. Yet at the same time many more intrusive powers are being vested at the EU level, because the euro zone has been forced to move in the direction of greater political as well as economic integration. The ECB is taking on the supervision of most euro-zone banks, for example, and it will also gain the power to require them to increase their capital or, in some cases, to shut them down. As part of the European semester, the Commission is getting extensive new monitoring powers, including the possibility of sanctions, over national budgets. The Parliament is arrogating to itself the job of scrutinising contracts for reform that are being debated and could yet be drawn up between national governments and Brussels. What explains the paradoxical combination of greater intrusive powers within the euro zone and the declining influence of the EU institutions?

Country-club rules

The answer is to be found in the shifting balance of power among EU countries, which is perhaps where the greatest impact of the euro crisis can be seen. The underlying fiction of the European project from the beginning was that member countries were broadly equal. Most institutions worked on the basis of one representative per country, although until the Nice treaty big countries were entitled to two commissioners. Admittedly, qualified-majority voting in the Council gave more weight to big than to small countries, but the system was still biased towards the small – and the most important decisions were almost always taken unanimously. Seats in the Parliament do reflect population size, but even there small countries have tended to be overrepresented (Malta has proportionately five times as many MEPs as Germany).

Yet despite all this, the notion of equality within the EU remains largely false. In practice, two countries have always acted as the principal engine in the European motor: France and Germany. Italy, the other big country in the original six, has never been able to match the clout of these two, partly because for many years its political system led to frequent elections and innumerable changes of prime minister, and partly because, after a long period of catch-up growth that lasted into the 1980s, its economic performance has been so dismal. Although the Netherlands has occasionally dissented, and has also in recent years turned noticeably more sceptical towards the European institutions, the Benelux trio have generally been willing to go along with Franco-German leadership. It has been hard for any newcomers, including largish countries such as the UK, Spain and Poland, to break in.

In the early years of the European project, especially after the Elysée treaty of 1963 that cemented links between the two countries, it was France that saw itself as in the lead politically, leaving the then West Germany to pay most of the bills. Indeed, this was one reason the French were reluctant to let the UK join in the early 1960s: in the words of the French foreign minister at the time, they did not want another cock on the dunghill. The EU institutions, including commissioners and their cabinets, were largely designed on French lines. The Commission’s first secretary-general was French. The common agricultural policy, the common fisheries policy, the customs union and the budget were all drawn up in many ways to the benefit of the French at the expense of the Germans (and, sotto voce, of the British when they were eventually let into the club in 1973).

By then the relationship across the Rhine had become more one of equals, as (West) German economic power asserted itself. The response of successive French presidents and German chancellors was to forge still closer bilateral links, even though they often came from opposing political families: Valéry Giscard d’Estaing with Helmut Schmidt, François Mitterrand with Helmut Kohl, Jacques Chirac with Gerhard Schröder. It became understood that, if France and Germany could agree on something, so (most of the time) could the rest. Even when the personal relationship was scratchy, the institutional bond between the two countries was close. The UK’s attempts to insert itself into a possible trilateral relationship usually failed: the prime minister who came closest to pulling this off was Tony Blair, but his European credentials were tarnished when the UK declined to join the euro, and even more so when he later backed George Bush’s war in Iraq, vehemently opposed by both the French and German leaders.

By this time, however, the Franco-German relationship was becoming more obviously lopsided. The turning point came with German unification in 1990, which made Germany significantly bigger than France both in population and in economic weight. That was indeed one reason Mitterrand pushed so hard for a single European currency: he hoped that it would give France more say in economic and monetary policy, which was increasingly being dictated for all EU members by the German Bundesbank. But as the years went by, it became ever more obvious that the Franco-German relationship had become a mechanism that was deployed to disguise German strength and French weakness.

There was a brief respite at the start of the euro when the German economy looked particularly weak, partly because Germany had joined the euro at a relatively high parity. The Economist, echoing Hans-Werner Sinn, a German economist, called Germany the sick man of Europe as recently as 2003.4

But German industry responded to the challenge by determinedly cutting costs and holding down wages, while the Schröder government’s Agenda 2010 reforms of the labour market and welfare system increased the German economy’s flexibility. Rising demand from China for German-made machine tools and other products also boosted German exports. The result was that, by the time the euro crisis broke out openly in 2009–10, the gap in economic and financial strength between the two leading countries in the euro had become gapingly wide.

Germany’s moment

This presented a big new challenge to the next incarnation of the dual leadership, after May 2007: Nicolas Sarkozy as French president and Angela Merkel as German chancellor. True to form and despite both coming from the centre-right, their relationship got off to a rocky start, not least because they were polar opposites in style. Sarkozy is a nervy, hyperactive showman. Merkel was a cautious, somewhat dour scientist. The two were known to find each other unbearable even though they had to work together – in English, no less, because neither spoke the other’s language. They quickly clashed after Sarkozy became president when he floated plans for a new “Mediterranean Union” that appeared to be meant to exclude Germany. But it was the global financial crisis that really tested them. At first France seemed to fare better during the crunch than Germany (and indeed the UK), with a much smaller loss of GDP in 2008–09.5 Along with the British prime minister, Gordon Brown, Sarkozy played a big role in meetings of the G8 and G20 that tried to co-ordinate an international fiscal boost to stop the crisis turning an inevitable recession into a deep 1930s-style depression. At one point, he even cheekily announced to the press that France was acting while Germany was merely thinking about it. But when the euro crisis erupted in 2010 the structural weakness and relatively greater indebtedness of France compared with Germany soon became a huge problem. Like so many of his predecessors, Sarkozy’s response was to try to get closer to Merkel. He played up France’s AAA rating as a key asset underpinning the successive rescue funds that had to be devised for Greece, Ireland, Portugal and later Spain and Cyprus. He and Merkel joined forces to suggest policy changes such as, at Deauville in October 2010, the involuntary involvement of the private sector in future debt restructurings. He pushed German-inspired fiscal austerity and did not press hard for an immediate agreement to the issuance of Eurobonds. The markets began to talk of “Merkozy” as the key tandem seeking to steer the euro zone out of its debt and growth crises. And the two leaders played a crucial role in 2011 in engineering the departures of Silvio Berlusconi in Italy and George Papandreou in Greece and their replacement by technocrat-led governments.

Yet as the crisis dragged on, the pretence that France counted as much as Germany wore thin. Increasingly, it was the chancellery, the Bundestag and the German constitutional court in Karlsruhe, as well as public opinion in Germany, that were doing the most to determine the shape and speed of the euro zone’s various rescue packages. As other countries, especially but not only those that had been bailed out, cut public spending, reduced budget deficits and pushed through structural reforms, an unchanged and unchanging France seemed to be turning into part of the problem rather than part of the solution. To Sarkozy’s embarrassment, France lost its first AAA rating in early 2011. And then, in May 2012, he lost the presidential election to the Socialist candidate, François Hollande.

Hollande was a stronger pro-European than Sarkozy, as well as being easier to deal with on a personal level. Although he came from the opposite political camp to Merkel, he was on the right of his Socialist Party. Yet as the man who led the party when it split over the referendum on the EU’s constitutional treaty in 2005, he was wary of any new treaty changes that the Germans might seek. Moreover, before his election he spoke out strongly against Merkel’s austerity policies and in favour of more growth; he wanted to see some form of debt mutualisation, which was anathema to Merkel; and during the campaign he said next to nothing about the need for structural reforms or public spending cuts at home, instead proposing tax increases, including a new 75% top rate of income tax.6

After he came to power, far from seeking to reinvigorate the Franco-German axis, he tried to make common cause with the Italian and Spanish leaders in urging more growth-oriented policies in place of excessive austerity.

The response from Germany was frigid in the extreme. After two years of crisis-fighting, the last thing Merkel wanted was to see a weakened France deserting the “northern” camp of creditor countries like Germany, Austria, the Netherlands and Finland and joining instead the “southern” camp of debtors, whose instinctive answer to any problem was to borrow and spend more. France, it was noted darkly in Germany, had not balanced its budget since 1974. One reason the Germans decided during 2012 that it would be too dangerous to let any country, even Greece, leave the euro was because they feared that it might lead to the currency eventually unraveling all the way up to the Rhine.

In short, France had now become, in German eyes, part of the problem and not of the solution. At a budget summit in February 2013 Hollande was so distant from the German position that he even failed to show up for a bilateral meeting with Merkel, something unheard of before. As one observer of EU summits noted, everybody always stopped to listen to Merkel; nobody paid any attention when Hollande took the floor, instead fiddling with their Blackberries and iPhones. The marginalisation of France is also denting public opinion in that country, which is increasingly turning against both the euro and the EU. The French industry minister, Arnaud Montebourg, has taken to attacking the EU for its “free-market fundamentalism”. Another striking example even among the pro-European elite was a 2013 book by François Heisbourg, from the Foundation for Strategic Research, in which he argued that the euro should be scrapped in order to preserve the European Union.7

Angela alone

In effect, Europe once again has what historians have called a German problem (with plenty of reason to hope that the solution will be more peaceful than in the past). The revival of a German problem is not at all comfortable for Merkel. Following the departure of Jean-Claude Juncker as prime minister of Luxembourg in late 2013 and of Estonia’s Anders Ansip in 2014, she is the longest-serving national leader in the EU. With France so weak and Hollande so ineffectual, she is also the unchallenged head of the northern creditor camp in Europe. And with German unemployment and youth unemployment both at 20-year lows, GDP back above pre-crisis levels, a budget close to balance and a continuing huge current-account surplus, her country is the uncontested economic hegemon of Europe. France and Italy are, at best, bystanders; at worst, largely irrelevant.

Yet Germany remains a reluctant hegemon, not least for historical reasons. Its foreign and defence policies are inward-looking, commercially driven and instinctively pacifist, unlike the UK’s and France’s. Merkel may enjoy wielding power in Europe, and being seen by the rest of the world as the continent’s most important leader, but neither she nor her country is entirely happy being treated too openly as such. Post-war German chancellors have traditionally seen more Europe as the answer to the German problem. But to critics of Merkel, especially during the euro crisis, her call for more Europe has often seemed like a call for a more German Europe, an effort to transform all euro-zone countries into mini-Germanys. The sensitivity this arouses was well demonstrated in November 2011 when a public claim by Volker Kauder, chairman of the Bundestag’s foreign affairs committee, that “suddenly, Europe is speaking German” was swiftly disowned by most of his colleagues.8

Germany, in short, remains highly attuned to outside criticism. It also has many blind spots economically. This not only embraces the crude caricatures of Merkel with a moustache and talk of a new Third Reich that are seen and heard in Greece and elsewhere. It also includes more serious complaints from the likes of the IMF and the US Treasury that Germany relies too much on exports and too little on domestic consumption for growth; and that, by running such a large current-account surplus, determinedly holding down wages and failing to generate sufficient internal demand, the Germans contributed to the problems of the euro zone in the first place.

Such claims are vigorously rejected in Germany. Ever since the Greek crisis erupted in late 2009, the Germans have seen two roots of the problem: fiscal profligacy and a loss of competitiveness. On this diagnosis, the cure for the first is public-spending cuts and tax rises; for the second, it is structural reforms to labour and product markets to reduce unit labour costs and restore competitiveness.

Germany has long kept its public finances under better control than others and it also pushed through the Agenda 2010 reforms in 2003. Other euro-zone countries simply have to copy this example. The notion that Germany might need to do more, for instance increasing wages or public spending, or boosting domestic investment, is often greeted with disbelief. German business, it is said in reply, must compete on a global stage; trying to rebalance within Europe by making it less competitive externally would be disastrous for the entire continent. That the coalition agreement in Germany may have this effect, by introducing a high minimum wage and lowering the retirement age for certain workers, reflects politics rather than policy choices.

As Merkel has come increasingly to be the main or even only voice that counts in the euro crisis, she has also become more dubious about the value of the EU institutions. Admittedly, she has quietly sided with the ECB against criticisms from the Bundesbank, even when two of her most loyal lieutenants, Axel Weber and Jürgen Stark, resigned in protest. But she has dragged her feet on banking union, and her response to calls from the Commission or from other European countries for debt mutualisation has been cold. For her, keeping in line with public opinion at home and satisfying both the Bundestag and the constitutional court in Karlsruhe matter far more than any dreamy euro federalist vision. She has at times been criticised by such predecessors as Helmut Kohl and Helmut Schmidt for this. The current coalition agreement suggests a number of changes to the Commission, including reducing its propensity to regulate.

It must be conceded that, at least for Merkel, this approach to Europe has worked wonders. For all the brickbats hurled at her, especially from abroad, for being too slow to move, too eager to impose austerity on the Mediterranean, too unwilling to boost demand at home and too leery of explaining to Germans how much they would lose if the euro were to break up, she has retained enormous popularity at home. Almost all other euro-zone countries have seen their leaders pushed out by voters as a result of the euro crisis. Merkel, however, took an impressive 42% of the vote in the federal election in September 2013, and she has since gone on to form a grand coalition with the Social Democrats that clearly leaves her and her finance minister, Wolfgang Schäuble, in charge of German policy on the euro. German voters, it seems, instinctively trust her both to do the right thing and to protect their interests.

Mediterranean angst, northern bravado

Worries about French weakness and about being lonely at the top have prompted the Germans to look around for other potential partners in the European Union. The UK is out, as it is seen as too semidetached from the project. The Mediterranean countries are also broadly no good. Most of them have received help from European bail-out funds and are still struggling to comply with their reform programmes and sort out their banks. Spain is likely to be the first to come good but still faces severe economic and political difficulties. Only Ireland has become the German poster-child for how a bailed-out country can change itself.

Italy is the perpetual underperformer in the EU: a big economy, second only to Germany in manufacturing, but seemingly incapable of reforming itself to regain lost competitiveness. Alone among euro-zone countries its income per head is lower now than when the euro began in 1999.

During his brief technocratic administration in 2011–12, Mario Monti promised to be a firm ally of Merkel’s, and he tried, with only partial success, to push through structural reforms, including to pensions. But at EU meetings he tended to side with those criticising Germany for not doing enough to boost domestic demand and the ECB for failing to act to lower interest rates in the periphery. Italy has raditionally favoured ever-closer union in Europe, on the basis that many Italians prefer rule from Brussels to rule from Rome, but such an approach is now out of favour in Germany.

Monti was forced to call an election in February 2013 in which he did badly. After complex bargaining, Enrico Letta, the young deputy leader of Italy’s centre-left Democratic Party, succeeded in putting together a broad coalition together with Berlusconi’s People of Freedom (PdL) party and a scattering of centrists – the same broad coalition that had backed Monti. The country came out of its excessive deficit procedure in June, giving Letta a political boost, but Italy’s politics remained as dysfunctional as ever. Letta found it no easier to enact reforms than did Monti. He survived an attempt by Berlusconi to bring down the government in October, just before the old rogue lost his parliamentary immunity following conviction on charges of fraud. Berlusconi’s move backfired; instead of bringing down the government, his own PdL party split, with a faction of moderates sticking with Letta. But Letta then faced a deadlier challenge from his own side. The turbo-charged former mayor of Florence, Matteo Renzi, took over the leadership of the Democratic Party in December, and then pushed Letta out of power in February 2014.

Like Monti, Letta had been popular with Merkel partly because he was not Berlusconi and partly because he understood the case for structural reforms at home. But Merkel was never confident of seeing much in the way of radical reform from his baggy left-right coalition. It remains to be seen what she will make of Renzi. This young and energetic new leader is now widely seen both inside and outside Italy as the last great hope of his country’s reformers. But his coalition is not much stronger than Letta’s, and he is vulnerable to the charge of being yet another unelected leader imposed on Italian voters.

That leaves the northern group in the euro zone, most of which are natural allies of Germany. Austria, Finland and Luxembourg are the only other AAA-rated countries that help to sustain the rating of euro-zone rescue funds. But all are small. The Dutch and Finns usually support German calls for austerity. Yet the Netherlands was downgraded in 2013 as the Dutch economy struggled to overcome the after-effects of a housing bust. The eastern newcomers to the euro, Slovakia, Slovenia, Estonia and (from January 2014) Latvia, are small countries as well, and Slovenia has hovered on the brink of needing a bail-out for its indebted banks. However, these two groups give powerful support to the broad German narrative, which is that the cure for the euro crisis is to be found in fiscal austerity and structural reform at home. The Baltic countries, especially Latvia, went through almost as wrenching an adjustment in the early 2000s as Greece, and without provoking riots. They are among the strongest advocates that other heavily indebted countries should follow suit. Latvia’s is now the fastest-growing economy in the EU.

What the euro crisis has clearly done is to break what used to be the EU’s east–west division. Most of the countries that joined in 2004, and even more so Bulgaria and Romania, which joined in 2007, remain significantly poorer than the others, but they are catching up as they benefit from EU structural funds. The new economic and political division in Europe is increasingly a north–south one. This is potentially troubling for the entire project. For its first 50 years until 2007, it always functioned on the basis that it was bringing about convergence between member countries. Since the euro crisis hit, the pattern has been more one of divergence. And that could easily stir up still more popular resentment of the EU in the south.

Germany is also looking to some non-euro countries as potential new partners, especially Poland and, to a lesser extent, Sweden. Indeed, were Poland to join the single currency, it is not too fanciful to see it vying with France and the UK as Germany’s main allies (French suspicion of eastern enlargement was often attributable to its worry about losing influence within the club to Germany). Bilateral German–Polish relations are warmer than they have been in 500 years. Merkel respects Donald Tusk, the Polish prime minister, so much that she briefly toyed with putting him forward for the Commission presidency. Radek Sikorski, the foreign minister, has been widely touted as a candidate for one of the top EU jobs, at least since his notable November 2011 speech in Berlin when he announced that he was “probably the first Polish foreign minister in history to say this, but here it is: I fear German power less than I am beginning to fear German inactivity”.9

The increasing influence of Poland does, however, throw the spotlight on the remaining big division in the EU, besides an economic north-south one. This is between the 18 euro-zone ins and the ten outs. As the euro zone pursues deeper political integration, including of fiscal policy and banking regulation, and even toys with setting up its own separate institutions, it is becoming increasingly clear that the single currency is the most important subgroup in the broader European club. That raises huge dangers for the maintenance of the wider single market at 28, and especially for the position of the most recalcitrant country of all: the UK.